As of 2022, the Foundation for Community Association Research estimates that 74.2 million Americans, or roughly 28% of the U.S. population, now live in some sort of a homeowners association. They are everywhere, from urban vertical residential towers and mixed-use condominiums, to sprawling planned communities in suburbia. Restoration companies work at a frenetic pace, often times under intense deadlines and pressure situations to preserve property. Many companies use different contracts for different types of work, for example, mitigation versus reconstruction work. Estimates are generated based on sophisticated software and created early in the process without always knowing the full scope of the ultimate work. The contract issues that arise are complicated enough for restoration companies in general, but what occurs when the loss occurs in condominiums, townhomes, planned communities where multiple, disparate owners with varying ownership interests exist? It is crucial to have a basic understanding of how these developments are legally structured to make sure you are contracting and dealing with the correct person or entity.
The general idea behind most homeowners associations is that portions of the development (lots or units) are owned in the name of one or more persons, while the rest of the development (common areas), may be owned by a separately incorporated homeowners association. Many of these associations have seven figure annual budgets and numerous legal responsibilities so they often times contract with a third-party management company to fulfill all their duties. A casualty loss that occurs in a clubhouse for a single-family residential community owned by its homeowners association, for example, would require a contract with the homeowners association. The contract would usually not be in the name of the management company, although, the manager could, under appropriate circumstances, have apparent agency to bind the association to the contract. The key point is that it is usually the association, not the management company, that is the signatory to the contract with the restoration company for common area restoration and mitigation work.
Not all common areas are owned by homeowners associations. In condominiums, for instance, the common area is sometimes owned by all the individual unit owners in undivided interests. That said, in most cases, condominium associations still have authority to bind association to a contract with the restoration company. In condominiums, complications arise in mitigation and restoration work when the loss is in “units” versus the “common areas.” So, where the loss occurs matters. If the restoration company is called out by the manager, then the manager should usually sign on behalf of the homeowners association entity, not the management company. However, if the company is called out by a “unit owner”, and not the manager on behalf of the association, then the “unit owner” should sign the contract. Issues of insurance coverage for losses are complicated and are usually dealt with in the association’s governing documents. In most cases, the association is duty bound by law to insure at least the common area. However, allocation of the deductible from a master association condominium policy could fall on a “unit owner” and such deductibles can be quite high, particularly in coastal areas more prone to natural disasters. In these situations, it would not be unheard for the “unit owner” to call out the work, particularly for water mitigation. In these cases, the “unit owner” may be the signatory on the contract.
Each state has their own laws which govern who insures what in a homeowners association. The National Conference of Commissioners on Uniform State Laws adopted a Uniform Condominium Act in 1980 and many states have adopted some version of the act based on NCCUSL’s work. Fundamentally, Section 3-113 of such act requires the condominium to procure “property insurance on the common elements insuring against risks of direct physical loss commonly insured against, which insurance…must be not less than 80 percent of the actual cash value of the insured property.” The act further provides that any “portion of the condominium for which insurance is required … which is damaged or destroyed must be repaired or replaced promptly by the association…” In short, the condominium association usually has to insure and repair the common area, which means if there is a casualty event impacting the exterior of a condominium, most of the time your contract will be with the association. The act also requires the association policy to include casualty insurance on the “units” too when the building has “horizontal boundaries”–i.e., a vertical, or “stacked” condominium. So, it is also feasible the association will be the signatory on a mitigation or reconstruction contract involving just the interior of the unit, although again, deductibles in some condominiums can be quite high and, depending on the legal documents for the association, a unit owner may be responsible for the deductible. If so, it’s conceivable the unit owner would contract with the restoration company, even in “stacked” condominium.
Townhomes are a mixed bag. Some associations insure the townhomes; some do not. The governing documents for townhomes will answer these questions. When called out to a townhome, it is important again to understand who you are dealing with. A casualty loss in a clubhouse on land owned by the townhome association will involve a contract between the association and the contractor. A casualty loss involving an actual townhome itself will involve either a contract with the owner or the association depending on the legal documents. Legal documents which require association-purchased casualty insurance on the townhomes may also compel the association to repair the damage. If so, the contract should be in the name of the association. Legal documents that compel an owner to insure his or her own townhome and make the repairs after the loss, however, will involve a contract between the restoration contractor and the association. Again, the devil is in the details of the legal documents for the townhome community.
In summary, casualty losses in homeowners association regimes can be complicated. Almost always, losses involving the common areas will involve a contract with the association. Sometimes the contract will be with the owner. Almost never will the contract be with the “manager” or the “management company,” although in some instances, such manager would have “apparent authority” to bind the association to the contract. Even in such situations, the actual name of the signatory to the contract should usually be the formal incorporated association, not the management company.
Brian Edlin, Esq.
Brian Edlin, Esq. is a partner in the Firm of Jordan Price Wall Gray Jones & Carlton, PLLC in Raleigh, North Carolina. Brian has a broad-based real estate and construction law practice representing restoration companies, contractors and others in the real estate and construction industries. Brian is a Fellow in the College of Community Association Lawyers and American College of Real Estate Lawyers. Brian is a Member of the Restoration Industry Association and an Adjunct Professor at both Campbell University and Texas A&M University. He may be reached at 919-828-2501 or [email protected]
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